Rupee Drops Most in Two Weeks as Slower Growth May Damp Inflows

By Shikhar Balwani -
Mar 3, 2014

India’s rupee fell the most in two
weeks on concern capital inflows will slow after a report showed
Asia’s third-largest economy cooled.

Gross domestic product rose 4.7 percent in the three months
ended Dec. 31 from a year earlier, following a 4.8 percent gain
the previous quarter, government data showed after markets shut
on Feb. 28. An official estimate for a 4.9 percent expansion in
the year ending March 31, compared with a decade-low 4.5 percent
in the prior 12 months, now appears “challenging,” according
to Citigroup Inc. Ten-year bonds dropped, adding to last month’s
biggest decline since November.

The rupee weakened 0.5 percent, the most since Feb. 18, to
62.0425 per dollar in Mumbai, prices from local banks compiled
by Bloomberg show. It gained 1.5 percent last month. The yield
on the 8.83 percent sovereign notes due November 2023 rose four
basis points to 8.90 percent. It climbed nine basis points in
February as Reserve Bank of India Governor Raghuram Rajan said
inflation remains the biggest threat to the economy.

“Growth in the fourth quarter would need to rise by 5.7
percent to meet” the government’s annual estimate, Citigroup
economists Rohini Malkani and Anurag Jha wrote in a note.
“Interest rates are likely to remain higher for longer to
contain inflation and elevated inflationary expectations.”

Rajan has raised borrowing costs three times since taking
office in September. Consumer-price gains slowed to 8.79 percent
in January from as much as 11.2 percent in November, the latest
official figures show.

Fund Flows

The rupee climbed the most since October last month as
global funds added $3 billion to holdings of local stocks and
bonds in February, according to exchange data.

One-month implied volatility, a gauge of expected moves in
the exchange rate used to price options, slid 23 basis points,
or 0.23 percentage point, today to 7.23 percent. Three-month
offshore non-deliverable forwards fell 0.3 percent to 63.19 per
dollar, data compiled by Bloomberg show. Forwards are agreements
to buy or sell assets at a set price and date. Non-deliverable
contracts are settled in dollars.